Jack in the Box CEO: Chasing Value is Not Sustainable

Jack in the Box is taking its long-term margins into consideration with its menu and promotional strategy.

Jack in the Box’s same-store sales lagged Wall Street expectations and slid under industry averages in the first quarter. But chairman and CEO Lenny Comma offered this point as fodder: step back and view the figures from a long-term lens—something he doesn’t believe many quick-service competitors are doing these days.

“I think the simple answer that really tells us, at least explains the gap to the [rest of the] industry, is value,” Comma said during a May 17 conference call. “I mean, at the end of the day what that marketplace today is very aggressive. We chose not to be as aggressive, but we have chosen to participate.”

When it comes to value in quick service, Comma said Jack in the Box wants to protect its margins long-term. The results you see in other brands putting weight behind deals? “I have been saying for a long time: it's not sustainable, it simply isn't,” he said. “If you look at the facts—that these are all asset-like businesses that primarily have a large franchise base—you've seen lots of commentary recently on franchise margins. You've seen a lot of commentary on franchise health. I just don't think that businesses are being responsible, for the strategy in place that essentially short-term makes the corporations look strong, but in long-term it isn't sustainable as the franchisees can also be strong alongside you.”

Put simply: Comma wants customers to pick Jack in the Box for reasons other than their wallets.

“I don't want to train them to believe that the only way to choose us is value. So, look at the balancing act, and we can turn on the juice, but I just don't think that at the end of the day it's worth the squeeze,” he said.

Jack in the Box’s stock took a more than 8 percent tumble Thursday following the brand’s second-quarter report. Same-store sales fell 0.1 percent across the system, year-over-year, which missed analyst predictions of a 0.1 percent gain. According to The NPD Group’s SalesTrack Weekly, the results lagged the quick-service sandwich segment by a percentage point for the comparable period. Company same-store sales increased 0.9 percent, driven by average check growth of 2.6 percent, offset by a 1.7 percent decrease in transactions. Franchise comps fell 0.2 percent.

The health of Jack in the Box’s franchise system sits atop the company’s targets. The chain refranchised 63 units in the second quarter and has already sold 29 in the third quarter to bring the mix to 93 percent. Jack in the Box also signed non-binding letters of intent with franchisees to sell another 17, which would bring the 2,245-unit company to 94 percent (currently there are 188 company stores).

Tack on Jack in the Box’s completed sale of Qdoba to Apollo for about $305 million in cash, and the company “made significant progress toward creating an asset-light business model that is less capital expenses,” Comma said.

Although Jack in the Box said it’s not bouncing off the diving board into the value deep-end, a greater emphasis on value in Q2 did contribute to a sequential improvement in traffic and under $5 transactions, both driven by two promotions—an LTO that featured four items at the $1–$4 price point and, later, a $3 bundle that offered three tacos and a drink that has continued into Q3. Comma said it’s working because the company is taking a different approach than most.

“We continue to see the impact of the value award which, has been negatively impacted margins at many of our major competitors,” he said. “At increasing the level of discounting, we chose to spend an incremental 1.5 million additional advertising in Q2. This protected our company and franchised restaurant level margins while avoiding the potential long-term consequences of training our customers to only come to us when we're offering aggressive deal.”

“We were also able to protect margins in the quarter by balancing our value offers with premium products, including a new food truck series of sandwiches and our current LTO Cholula Buttery Jack, a line extension of our Buttery Jack burgers.”

Jack in the Box has more menu innovations coming in the back half of the year, including a snack item Comma said will arrive at a lower price point, “but deliver a lot of food for the money.”

And like the earlier deals, Jack in the Box will strike a balance by promoting some of the differentiated products Comma said make the chain a unique player in the quick-service space.

Jack in the Box will continue working on its delivery program as well, which is now live in all major markets and two-thirds of the total system through third-party vendors, including DoorDash, Grub Hub, and Postmates. On May 10, Grub Hub announced it was partnering with Jack in the Box to bring the chain’s food to hundreds of locations across the country, and that online ordering and delivery from was available via the platform in more than 20 markets, including Los Angeles, San Diego, San Francisco, Dallas, Phoenix, Denver, St. Louis, and Las Vegas. Grub Hub plans to expand delivery to hundreds more stores throughout the year, the company said.

Jack in the Box is expanding mobile app tests. Comma said, on average, the brand is seeing higher tickets with mobile orders and “believe we'll be in a position to begin rolling it out by the end of the year.”

Jack in the Box added two key executives recently as well—chief operating officer

Marcus Tom and chief financial officer Lance Tucker. Tom most recently served as senior vice president of operations at JAB Beech Inc.’s Caribou Coffee brand from January–December 2017. He was senior vice president of operations at Einstein Bros. Bagels from July 2015–December 2016. Tucker comes over from a senior vice president, CFO, and chief administrative officer role at Papa John’s International, Inc.